More Under-the-Radar Chinese Internet Stocks to Follow

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As last weeks article presented, Chinese Internet stocks have struggled over the last two years. Leaders such as search giant Baidu have seen losses while the S&P 500 has seen a meaningful 34% gain. Outside of the major Chinese Internet stocks, the previous group of ChinaCache, Renren, and SINA Corporation had seen losses over the last two years closer to 50%. The new group hasn’t seen the same level of weaknesses in the last two years, but the stocks have struggled to garner valuations similar to domestic stocks. Investors should give the sector another look as ultimately Internet growth in China should explode over the next decade as mobile phones provide greater access to data.

Recently, the sector has gotten a small boost due to the rapidly increasing valuation of Alibaba, now valued at around $100 billion. The new group includes Youku Tudou (NYSE: YOKU), NQ Mobile (NYSE: NQ), and 21Vianet Group (NASDAQ: VNET) as stocks beaten down in the last few years even as growth potential remains intact. See chart below:

NQ data by YCharts

As with all Chinese Internet stocks, the market loves to compare them to US stocks. In most cases, the basis of the label is valid, but the companies aren’t all identical and the markets in China and the US aren’t the same.

YouTube of China

Youku Tudou is likely the most recognized stock in the group. The leading Internet television company expects revenue to reach $510 million. The stock has a market cap of $3.3 billion, signaling the weakness that exists in Chinese Internet stocks. Analysts expect revenue to surge nearly 50% next year, though the key will be for the company to turn that revenue into significant profits. Regardless, a domestic stock with that growth would trade at over 10 times revenue.

The company is seeing strong penetration in mobile where it has 100 million active monthly users, over 170 million daily video views, and over 70 minutes average daily user time spent.

Youku faces competitive threats from Internet search giant Baidu aggressively entering the video market with the purchase of PPS. Combined with the iQiyi business, Baidu claims the largest online video platform by number of mobile users and video viewing time. Conversely, the company is collaborating with SINA to promote its video library on the popular Weibo platform.

Mobile security and gaming leader

NQ Mobile provides mobile security to a vast user base of over 326 million registered users plus 77 million registered user accounts for FL Mobile. The company is seeing total users and MAU roughly double year-over-year with fast growth expected in the mobile games sector. It operates and distributes 14 games on iOS and 36 games on Android platforms as of the end of Q1. In fact, the company recently launched two self-developed games.

With the recent acquisitions, analysts expect revenue to surge this year to nearly $180 million with the stock only trading around a value of $450 million. Furthermore, revenue is expected to surge 35% in 2014 to reach $244 million. Even more importantly, the company is already solidly profitable with earnings of $0.66 in 2012, expected to nearly double to $1.20 by 2014. With $122 million of cash equivalents, NQ Mobile only has an enterprise value of $330 million.

Equinix of China

The Internet data center services provider, 21Vianet, saw revenue grow 26% during Q1 2013. Analysts see revenues surging 35% a year in both 2013 and 2014 to reach $450 million. With earnings remaining flat around $0.45 in 2013 and surging to $0.73 in 2014, the stock offers a compelling valuation if the company can hit those numbers.

The company recently launched the availability of Microsoft Windows Azure services in China via the 21Vianet platform. The service offers disaster recovery, data sovereignty and improved local performance and now provides Chinese customers security, reliability, scalability and flexibility in application development and deployment.

Bottom line

While some of these Internet stocks have had minor bumps recently, the stocks still trade considerably below comparative valuations in the US. Revenue continues to grow in the 25% or greater range for all of these stocks even during a tough economic period in China and all of Asia. Once the economy rebounds and investors become more comfortable that these larger technology stocks in China don’t carry the same fraud risks as the reverse merger stocks, the sector could see huge gains down the road.

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Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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